A short sale occurs when you, 1. owe more on your mortgage and (any other liens on the property), that you can get from the sale of your home in today's market. 2. You the seller are unwilling or unable to bring money to the closing. The property has not been foreclosed upon, which affords the seller a window of opportunity to sell the property in hopes to at least partially satisfy the amount owed to the lender.
Short sales are considered preferable to foreclosures because they lessen the negative impact to the subdivision and lessen the hit to the seller's credit. If the seller is current on other payments, a short sale may lower their score by 50 points. A foreclosure may lower their score by 50 points. A foreclosure may impact a credit score as much as 200 points.